Zillow Plunges After Revenue Forecast Misses, Analyst's Cut
(Bloomberg) -- Zillow Group Inc. tumbled after the real estate listings company’s revenue forecast missed even the lowest analyst estimate and its second-quarter results raised fresh questions about the company’s foray into buying and selling homes.
Zillow reported earnings late Monday and lowered its guidance for full-year sales and Ebitda, or earnings before interest, taxes, depreciation and amortization. The Seattle-based company also reduced the number of homes it’s targeting to buy and sell in its new Zillow Offers business because of longer-than-expected closing times.
The shares dropped 17 percent to $48.21 at 10:39 a.m. in New York, their biggest decline since at least August 2015.
The “wobbly” second-quarter results are “an indicator of what to expect over the next 18 months as the company cuts its teeth on a new model and management gets pulled in new directions,” Lloyd Walmsley, an analyst with Deutsche Bank AG, said in a note to investors.
Zillow has expanded into the buying and selling of homes, and on Monday announced it’s acquiring Mortgage Lenders of America, a transaction that’s intended to streamline the process for buyers of Zillow-owned homes and create a new source of revenue for the company. On a conference call Monday, Chief Executive Officer Spencer Rascoff sketched out a hypothetical scenario in which the company could bring in about $800 million annually by making home loans.
“Any time the stock price declines like this, it’s painful in the short term,” Rascoff said in an interview Tuesday with Bloomberg Television. “It’s disappointing, but we think long term, the story is intact.”
More broadly, Zillow’s efforts at buying and selling homes have been misunderstood by people who have labeled it home-flipping, Rascoff said in the interview. Zillow is getting the opportunity to bid on 15 percent of all homes being sold in Phoenix, he said.
“It’s not home-flipping, it’s a service to the seller,” Rascoff said. “The reason I take issue with ‘home-flipping’ is that ‘home-flipping’ misunderstands the size of the opportunity.”
Skeptics say it will take Zillow time to optimize the new business, while others contend that the entire model is flawed. The company’s disclosure that it’s taking longer than expected to close transactions indicates that sellers are shopping Zillow’s offers around to see if they can get a higher bid, said Steve Eisman, a managing director at Neuberger Berman Group who has a short position in Zillow shares, meaning he’s betting they will decline.
“I thought it was a horrible business,” Eisman said in a “Bloomberg Surveillance” radio interview with Tom Keene on Tuesday. “I take it back. It’s a business that is potentially disastrous.”
Adding a loan-origination unit probably won’t be enough to offset pressure on Zillow’s core business, Bloomberg Intelligence analysts Andrew Eisenson and Mandeep Singh wrote in a report. The company’s main business involves selling advertising to real estate agents.
Walmsley of Deutsche Bank said he sees the move into mortgage origination “pushing the business model into more uncharted territory.” As the company’s businesses become “more complex and unfamiliar,” there’s “risk of further multiple compression and execution risk. Even in a stable environment, this is a lot of change, and with certain housing indicators flashing warning signs.”
Zillow’s quarterly results “revealed challenges” in the company’s homes, rentals and agent businesses that are likely to limit investor optimism, Bank of America Merrill Lynch analyst Nat Schindler wrote in a note, downgrading the stock to neutral from buy.
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